Friday, December 08, 2006

Why laymen don't trust economists

Exhibit A: An independent audit of the World Bank's lending programs finds that they have mostly failed to alleviate poverty and inequality in the developing world. Despite forming, then following, the overwhelming consensus among development economists and policymakers, it turns out the World Bank (and by extension, those economists and policymakers) have simply been wrong, terribly wrong about it's efforts:

...the study found that growth has rarely been sustained, exposing the most vulnerable people -- the rural poor -- to volatile shifts in their economic fortunes. Per capita income rose continuously from 2000 to 2005 in only two in five of the countries that borrowed from the World Bank, the study reported, and it increased for the full decade, from 1995 to 2005, in only one in five.

The study emphasized that economic growth is, by itself, no fix: How the gains are distributed is just as important. In China, Romania, Sri Lanka and many Latin American countries, swiftly expanding economies have improved incomes for many, but the benefits have been limited by a simultaneous increase in economic inequality, putting most of the spoils into the hands of the rich and not enough into poor households, the study concluded.

This might sound like an obvious point (and it is) but it's also a flat-out rejection of the foundation of neoliberal economic policies. Direct methods to reduce inequality (unions, higher wages, price supports) were essentially forbidden under the World Bank/IMF cartel's rules, with the academic justification that those methods were harmful to growth, and that growth had to precede efforts at equality.

But it turns out - and this makes me want to hit my skull against various unyielding surfaces - that if you don't address inequality, it won't get better. A lesson that we all should have learned from the 20th century: unregulated capitalism tends to concentration and inequality, not competition and entrepreneurialism.

It certainly won't get the same attention as the ISG report did, but in it's own way this independent audit of the WB's lending programs deserves to have the same effect: Our current policies are a disaster, they aren't even working by their own standards, and we need to start listening to different voices - there's always been a strong dissident voice within the field of development economics, even if it's been largely ignored since the 1970s or so.

I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.

The accusation that the field of economics has it's own prejudices, it's own ideological preferences, which all obviously affect which policies The Temple endorses, is guaranteed to raise the hackles of anyone who truly believes that economics is a hard science, deserving of the same respect that physics has.

Without getting in to the question of whether economics actually merits the same credibility as physics, even if it did the public would have a right to be skeptical. Don't think physics can be unduly influenced by personal grudges, received biases, or deference to tradition? Check out the early career of Subrahmanyan Chandrasekhar.

Card's example above gives us a perfect case study of how pernicious economic biases are. Here's a guy whose data showed not that the minimum wage should always and everywhere be raised, but simply that raising the minimum wage had no obviously negative effect on employment, and could even have a slightly positive effect. And his account of the reaction of his peers:

They thought that in publishing our work we were being traitors to the cause of economics as a whole.

And, as it just so happened, the "cause of economics as a whole" just happened to be exactly aligned with the interests of capital in direct opposition the interests of labour and the poor.

Card proclaims himself free of politics, which I'm inclined to believe. But the point is that because his data could be interpreted politically in a progressive fashion, his colleagues (and friends!) disowned him. Somehow, if his data had shown the opposite, I doubt their reaction would have been the same.

You see a certain amount of skepticism, if not hostility, to the field of economics among the left. This is why - not because the left is innumerate, but because actual living economists (once the colleagues of men like Keynes and Galbraith) are now incredibly hostile to pragmatic policies that the left believes are necessary. Right-wing freaks like Greenspan and Friedman are revered and set national and global policies that last a generation, while the academic inheritors to the economic left are widely ignored.